Richard Russell – October Stock Plunge, Gold & The Fear Index

The Godfather of newsletter writers, Richard Russell, had a great deal to say about gold, the ‘fear index,’ stocks in October, bonds, and what subscribers should be doing right now. Here is what Russell had to say in his latest report: “The last two weeks saw four distribution days in both the S&P 500 and the NYSE Composite, and three distribution days in the NASDAQ. A distribution day is reported when the market declines on increasing volume. Distribution days are deemed days when institution are selling. Four or five distribution days falling within a two week period are usually enough to send the trend of the market lower.”

Richard Russell continues:

“We’re now dealing with October, which historically is both a down month and a bottoming month. As for my position, I continue to believe that the primary trend of the market turned bearish in 2007, and that it is still bearish (although the bear trend has been suspended for awhile due to the Fed’s actions).

The VIX, often called the ‘fear index,’ is a forward looking metric (it’s actually a measure of the implied volatility of the S&P index over the coming 30 days). The VIX in recent months has been fluctuating in a very low area below 20 (see chart below). Back in June the VIX jumped up to 26.66, then settled back to its low range.

In past history, extended periods of very low volatility have been followed by major upward thrusts in the VIX. The cycles in the VIX tend to be repetitive. Following the recent bouts of extremely low volatility, a period of super-high volatility may be anticipated.

It’s been a year since we’ve seen high numbers in the VIX. Super-high volatility is often accompanied by a collapse in the Dow. Thus, a forthcoming period of a very high VIX (maybe as high as 80) may next be expected. An upward spike in the VIX is usually accompanied by a downward plunge in the Dow.